Uncapped Notes vs. Capped Notes

These terms relate directly to the previous discussions of convertible date and valuations. As discussed, convertible notes delay placing a valuation on a company until a later funding round. When entrepreneurs and investors agree to a “capped” round, this means that they place a ceiling on the valuation at which investors’ notes convert to equity. So if a company raises $500,000 in convertible notes at a $5 million cap, that means that investors will own at least 10% of the company when it raises a later round of funding (500,000/5M). An uncapped round, more favorable to the entrepreneur, means that the investors get no guarantee of how much equity their money purchases. Let’s say the same company raises $500,000 in an uncapped round. If they're able to convince new investors to value their company at $10 million, convertible note investors are instead left with just 5% of the company.